The number of lawsuits involving 401(k) plans has increased significantly in recent years, peaking in 2020. The number of ERISA lawsuits in 2020 saw an 80% increase compared to 2019. This trend has continued in 2021, including an increase in the number of lawsuits against small plans.
Many of the suits were filed due to the plans’ high fees and unfavorable investment options with low returns. Such a tendency makes many companies cautious, and to take measures to avoid litigation. The following examples illustrate the need for plan sponsors to be prepared for potential excessive fee litigation.
Davis v. Salesforce.com
On October 5, 2020, a federal district court dismissed a case brought against the Salesforce.com 401(k) planning committee for failing to monitor its fiduciary duties. The case was brought by former employees.
The plaintiffs accused the defendants of failing to select low-fee share classes and choosing to ignore the fees charged by actively managed funds. They also accused them of not looking into other investments such as pooled accounts and mutual funds.
The court found that since mutual funds have different management styles and different risks, claims that the funds are cheaper than those offered by the Plan do not meet the requirements of the fiduciary duty. Also, failing to choose a share class with the lowest fees is not enough to support a claim of a breach of loyalty. The accusation of not offering alternative investment vehicles to mutual funds was also not found to be a fiduciary duty.
Kurtz v. The Vail Corporation
On January 6, 2021, the federal district court dismissed the lawsuit against the Vail Corporation’s 401(k) plan. Similar to the previous case, the plaintiff alleged that the plan’s investments were excessively costly compared to similar plans, passively managed funds and low-fee share classes were not selected and that the plan’s fiduciaries violated their duties of loyalty and prudence.
The court noted that in order to claim ‘excessive fees’ a fund must show that the fees it charges are so disproportionately large that they cannot have been the product of bargaining. The court noted that it was not unreasonable for a plan participant to believe that the plan’s selection was poor based on the availability of lower-cost options. However, ‘nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund’, the court cited Hecker v. Deere & Co.
The court noted that these claims should not be based on hindsight or the performance of selected investments. Instead, they should be based on the conduct at the time when the claims were made.
The lawsuit factors
According to Bloomberg Law, the number of 401(k) lawsuits keeps rising due to the maturing body of law, new tools available to help plaintiffs’ attorneys, and the COVID-19 pandemic. New tools and databases now allow fiduciaries to investigate the actual fee level of 401k plans. Before, it was difficult for plaintiffs’ lawyers to uncover the fees involved in retirement plans. Through the use of new tools, they were able to gather vital information that can be used to generate potent complaints.
The global pandemic also boosted the number of retirement lawsuits because it motivated people to take advantage of their savings. Many people started to make inquiries about their fees and investment plans.
Key Points
These two documents remind fiduciaries that their duties are not based on hindsight. Instead, they are based on the decisions made at the time. Thus, it is critical that fiduciaries follow a good investment policy and document how and why they make their decisions.
RiXtrema offers a wide variety of products for fiduciaries such as 401k Fiduciary optimizer which allows one to analyze the funds and find an alternative in a lower fee share class. Schedule a Demo with us to see how you can find lower fee alternatives or reach out to clientsuccess@rixtrema.com to set up a demo.
